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Since the outbreak of the war with Iran, gold prices have fallen from near record highs.
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The decline surprised those who expected the precious metal to act as an inflation hedge.
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Here are three reasons why gold prices have fallen sharply.
For months, a gold purchase was a sure thing.
It was the main beneficiary of the depreciation trade, with investors dumping the dollar and government bonds in favor of precious metals. It has been a key material in data center expansions around the world. Perhaps most notably, it became a favorite among retail traders.
Over the course of a few glorious months, an asset known as a safe haven morphed into a speculative bet. Earnings were strong—until they suddenly weren’t.
After Kevin Warsh was named as the new Federal Reserve Chairman in late January, the first thing that occurred was a knee-jerk sell-off in gold. But the metal has largely made up for that loss.
Now, gold prices have fallen back more than 10% since the war with Iran began.
So what is given? With inflation currently a major concern for investors, shouldn’t gold’s historical role as an inflation hedge drive gold prices higher? higher? Not in this case.
Here are three reasons why gold is plunging:
Gold may have acted as an inflation hedge in the past, but that’s not the case track inflation. Instead, gold moves with inflation-adjusted interest rates – which have been rising sharply since the start of the Iran war. That’s because…
Bond yields have risen during the Iran war as investors braced for a surge in energy-driven inflation. Jerome Powell said on Wednesday that the Fed was watching the matter closely. Gas prices at gas stations have increased.
All of this pours cold water on the prospect of rate cuts. As of Thursday, the bond market was no longer considering a rate cut in 2026. Since gold doesn’t bear interest, it loses its appeal when bond yields rise.
The types of investors who drive retail speculation are usually the weak hands in the market. When the easy rewards disappear and the fun ends, they tend to quit.
Market veteran Ed Yardeni summed it up succinctly on Thursday: “Profit-taking after the pump.”
So, with gold struggling and bonds selling off, where do investors go for safety? The U.S. dollar has always been the main destination. The U.S. dollar index has gained 2% since the war began, and the greenback has also gained against most global currencies.
Gold’s future will depend on how long the war with Iran lasts, which will determine when inflation concerns ease. Only when these jitters calm down – and the weak speculators are washed away – can gold regain its status as a safe-haven asset.
Read the original article on Business Insider
